When it was announced in late 1980 that President-elect Ronald Reagan had
chosen Merrill Lynch president Don Regan as Treasury Secretary, supply-siders
went into despair. He had not been on any of our wish lists for that critical
post and we naturally assumed that he would be a drag on the plans to cut the
income-tax rates from the top marginal rate of 70% across the board by roughly
30%. We were thankful that Reagan had chosen one of the supply-side gang as
Budget Director, David Stockman. Amazingly, it did not take more than a few
months to realize that Regan was a godsend and Stockman was a traitor to the
cause. Regan, we learned, immediately asked for all the speeches the Gipper
had made on matters of public finance and markets, and then sat down and read
them all. He knew he would have to assemble a team that really believed in the
Reagan agenda that got him elected, instead of imposing his own.

The men he brought in were part of the gang, true believers in the curative
powers of lowering unnecessarily high tax rates on income and capital. On the
other hand, Stockman fell into the clutches of the budget balancers, including
Alan Greenspan, and decided to pursue his own agenda, cutting spending
especially on "the social pork barrel." President Reagan found he
had a true ally in Regan and eventually a problem with Stockman, who told
William Greider of the Atlantic magazine in a series of interviews that
the supply-side growth idea was only a "Trojan Horse," to starve the
government of revenues by cutting tax rates wherever possible. That debate
still haunts the GOP.

All this came to mind Tuesday when I learned that Don Regan had passed away,
84 years old, going straight to supply-side heaven. Amazingly, his
intellectual vitality right up to the last inspired him to write an op-ed for
the Wall Street Journal in support of President Bush's tax cuts. Here
it is:

WHAT A RELIEF
A Reaganomic 'GPS'
Bush's stealth tax cuts are worthy of the Gipper.

BY DONALD T. REGAN

The recent debate over President Bush's tax proposal had so many
echoes of the Reagan era that I could almost recite the parts of the various
players from memory. Amid all the clamor, few have stepped back--as President
Reagan did in 1981--and asked three basic questions: Where are we, where do we
need to go, and how are we going to get there? Unfortunately, we have no GPS
that could pinpoint where we are and how to navigate from here to there.

The 1981 tax debate occurred when the economy had serious ills. It was
entangled in a strange phenomenon known as stagflation--a combination of slow
growth and inflation that could not be accounted for by the dominant Keynesian
economic theory of the time. Keynesian economists believed that slow
growth--or no growth--was the cure for inflation, but somehow both were
happening at the same time. Tax cuts, it was feared, would only create more
deficits, stimulate more inflation and raise interest rates--already in the
high teens--further into the stratosphere.

Ronald Reagan, however, was not troubled by this state of affairs. To answer
the question of where we were, he recognized that growth was held back by high
tax rates and excessive regulation. As for where we needed to go, his answer
was that the first priority was economic growth; other problems would take
care of themselves as long as the Federal Reserve maintained a steady and
moderate rate of monetary expansion. And his policy for how we were going to
get there was breathtakingly simple--the government was going to get off the
back of the American people by taxing and regulating less.

The opponents of Mr. Reagan's program were saying many of the same things they
said in response to the Bush tax cut proposal: We can't cut taxes, it will
increase inflation and raise interest rates; deficits are already too high;
tax cuts will only deprive the government of the revenues it requires to meet
the many needs of the American people.

Thanks to President Reagan, we know a lot more today, although it seems that
many in Congress didn't get the memo. We know that tax cuts spur economic
growth by improving incentives to work and invest and by making more money
available for new ventures and small business, where the real job growth
occurs in our economy. There are many examples of this in recent history, from
the Kennedy tax cuts of 1962, through the Reagan cuts of 1981 and 1986. We
also know that deficits do not cause inflation or cause interest rates to
rise. Although the deficits during the Reagan period were higher (as a
percentage of gross domestic product) than the deficits projected today,
interest rates declined after the Reagan tax plan was adopted.

As I interpret Mr. Bush's tax program, I think I see that he has tried to
answer the same three questions that President Reagan always kept in
mind--even though the economic problems he faces are different. We are not in
a period of inflation. Quite the opposite; inflation and interest rates are at
historic lows. We are, however, in the midst of a slow economic recovery, in
which jobs are not coming back as quickly as we might have hoped. In fact, the
whole economy is changing right before our eyes, and will continue to change.
Unskilled or semiskilled jobs are going overseas, and jobs involving knowledge
and skill--technology, specialized services, finance, health care, energy,
entertainment and communications--are the growth areas here at home.

The Bush tax program is ideally suited to address this new economy. Whereas
Mr. Reagan saw generalized economic growth as essential, the Bush plan has
both a stimulative component to start the engine and a long-term component to
advance the process of moving our economy into the new areas of future growth.
That's what the dividend tax cut and the cut in the capital gains rate are all
about. As companies increasingly pay out dividends, and pay less of a penalty
for making profits, investors will have funds to invest in new ventures. Our
economy, already the most dynamic in the world, will continue to change and
grow in response to the growing skills of the American people, particularly in
the service sector.

President Bush should also aim to extend his tax-relief vision beyond
financial transactions such as dividends and capital gains. In a knowledge
economy, education and learning are real factors of production. Americans who
add to their knowledge and skills are, then, adding to the stock of the
nation's productive assets. The president's next tax bill should recognize
this with tax credits for individuals that match the investment tax credits
that have been available to business. That's a program that assesses where we
are, where we need to go, and how we are going to get there.